There’s a lot to think about when considering buying a business and a buyer or seller will undoubtedly require professional help. Our legal experts Baines Wilson have some great advice for buyers.

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There are two distinct methods of business acquisition available: share purchase and asset purchase. Whilst both of these methods have advantages and disadvantages, the final choice will be the result of personal, legal, commercial, taxation and financial considerations.

Share Purchase

In a share purchase, the shares in the company are sold by the seller to the buyer. The company and its arrangements are unaffected so the deal is effectively inclusive of all assets and liabilities. This is both a pro and a con but means that both the known and unknown liabilities of the company will pass to the new owner.

This is often described as the “warts and all” approach. Given all liabilities are to be inherited it can be quite risky. However, given that the buyer is taking on such a (potentially) large risk, he can expect/demand that the seller gives contractual assurances in the form of warranties and indemnities as protection against any hidden liabilities past, present or future. These are intended to reduce the purchase price in the event of problems manifesting themselves after completion.

Of course, the seller will try and limit this liability as much as possible contractually (e.g. as to amount and time for claims to be made) and also by carrying out a detailed disclosure process.

If a share purchase is deemed the most appropriate way to buy a business, irrespective as to the extent of warranties and indemnities on offer, the buyer normally will carry out an extensive due diligence exercise to try and reduce risk and find out as much as possible for doing the deal. This requires professional advice from solicitors and accountants and will focus on the financial, legal and commercial position of the business.

One pro of a share sale is that there is no need to worry about transferring any contracts or registrations and accreditations; although it is important to assess whether there are any change of control clauses or provisions therein and if so to work out how to deal with them.

Taxation: in terms stamp duty, this will be payable at a rate of 0.5% on the value paid for the shares. Potentially if buying a company with significant property assets there could be a significant stamp duty saving over an asset deal so lower Stamp Duty may be a pro of a share deal but needs weighed against the liabilities risks.

Entrepreneurs’ Relief may be available which means a seller would pay tax at 10% on all gains on qualifying assets up to a cumulative life time limit of £10 million.

Asset Purchase

In an asset purchase, the buyer has the ability to “cherry pick” the assets it wants and can leave behind the liabilities (other than employment contracts).

Therefore, as liabilities can be left with the seller and only the agreed/stated liabilities are assumed, there is potentially less risk than with a share deal. Consequently the extent of due diligence and warranties/indemnities can potentially be reduced and tailored.

A potential problem with an asset purchase is the target’s contracts. These contracts will need to be novated or assigned to the buyer, often requiring the consent of the third party. Although this may not be a problem, a third party may be able to refuse the assignment altogether or attempt to change the terms and conditions of the existing contract.

In terms of cost, Stamp Duty Land Tax is charged on the part of the consideration allocated to land and any inherent goodwill in that land at rates of up to 4%. It is no longer paid on the other assets acquired.

An asset deal may also involve a double tax charge for the seller, firstly a corporation tax charge on the company on the disposal and then on the shareholder in form of either income or capital gains tax when extracted from the company.

Seeking advice at an early stage will help a prospective seller or buyer determine the best route for them and it is a decision which will require help from legal and accountancy professionals.

If you are considering buying/selling a business and require further help in relation to it please call John Wilson, Andrew Hill, Kate Parker or Eleanor James on 01228 552 600 who are all specialist corporate and commercial lawyers.